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Losing the Tax Debate

Romney is behind, but there's time for a turnaround.

12:10 PM, Sep 26, 2012 • By JOHN MCCORMACK
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Can a Republican candidate lose a debate on tax policy and win the presidency? The Romney campaign seems to think so.

Mitt Romney

Over the past couple of months, the Obama campaign has unleashed a barrage of TV ads that contain the same specific and potent attack: Mitt Romney will raise taxes on middle class families by $2,000 in order to cut taxes for the rich. The claim is false, but the Romney campaign hasn't really responded.  

And the attacks have been working. As the Wall Street Journal reported on September 17: "At least four polls in recent weeks have found Mr. Obama holding an edge over Mr. Romney on who would best handle the issue of taxes." The Romney campaign's pollster Neil Newhouse told reporters last week that Obama's advantage on the tax issue is simply a function of Obama's convention bounce. But Romney actually lost his edge on taxes before the conventions. "A Gallup poll in late August found Mr. Obama holding a nine-point lead on the issue of taxes, after Mr. Romney led in July," the Journal noted. 

Despite losing his advantage over Obama on taxes, Romney's recent TV ads have neither defended Romney's tax plan nor attacked Obama as a tax-hiker. "I'm not sure that voters really understand the differences between the plans that Romney has and Obama has, and I think that's one thing we're committed to trying to do moving forward is defining the differences between the two candidates on taxes," Romney pollster Neil Newhouse told reporters on September 17. But according to the Romney campaign, the only Romney ad currently running that even mentions taxes is this spot on Romney's economic plan. "Champion small businesses," Romney says. "Have tax policies, regulations, and health care policies that help small businesses." What are these tax policies? How do they help small businesses? Will they raise taxes on the middle class? Romney doesn't say.

The group Crossroads GPS is running an ad that attacks Obamacare for raising taxes on the middle class and defends Mitt Romney from the tax-hiking claim. But Crossroads' $5 million ad buy can't compete with the tax message pounded by the Obama campaign in TV ads and almost every stump speech and TV interview.

It may be late in the game, but there's still time for Romney to make a strong case for his plan and against Obama's tax hikes. And it's imperative that he makes the case during the debates, media appearances, and in paid advertising. Taxes and and spending are the government's two most powerful tools to fix the economy. If Romney loses the debate on taxes, he will almost certainly lose the debate on the economy.

The case against Obama's tax hikes is fairly straightforward. Obamacare contains 20 different tax hikes on everything from jobs and medical devices to over-the-counter medications and health insurance plans. Many of these taxes haven't yet kicked in, but they will if Obama gets another term in office. Then there's Obama's plan to raise taxes on individuals and small businesses that make more than $250,000. Raising taxes on the wealthy usually polls well, but there's a two-pronged response: One, it will lead to fewer jobs by raising taxes on small businesses, and, two, it's not an effective deficit-reduction plan.

If raising income tax rates is such a great idea, why didn't Obama do it during the two years when Democrats controlled Congress? The answer, as Obama said in 2010, is that "that would have a destimulative effect and potentially you'd see a lot of folks losing business, more folks potentially losing jobs. That would be a mistake when the economy has not fully taken off." Does the president think it's now okay to raise taxes because the economy has "fully taken off"? This is a question Obama hasn't been asked by the press, but it's a question Romney can pose during the debates.

And what about Democratic claims that the Bush tax cuts are largely responsible for the debt? Senator Pat Toomey (R, Pa.) says it's "absurd" to think Obama's tax plan is a solution to the deficit. Toomey points out that, under the dubious assumption the tax hike wouldn't hurt economic growth, Obama's plan "would generate enough additional revenue over the next 10 years to reduce the deficit by 8 percent."

"What about the other 92 percent?" Toomey asks. "Since they’re not willing to cut spending on anything ever, obviously the only solution is a tax increase on the middle class. That’s inevitably where they’d end up going." 

The case for tax reform may not be as easy to make as the case against Obama's tax hikes, but the good news for Romney is that his vice presidential running mate Paul Ryan makes a very effective and comprehensible argument about why current tax code--about which Obama has done nothing to reform--is corrupt, irrational, and anti-competitive. 

Call it the "GE Rule." While reporting on Paul Ryan's congressional townhall meetings in 2011, I watched as multiple constituents brought up the fact that GE, one of the largest corporations in America, doesn't pay any taxes. That provided Ryan with the perfect opportunity to make the populist case for tax reform.

"Is it right and fair that ... the third or fourth largest company in America, General Electric, made about $14 billion and didn’t pay any taxes? Of course not," Ryan said at a townhall meeting in the fall of 2011. "Drive around town for the next 10 minutes, and you’ll see a brown UPS truck somewhere. UPS is a really large company as well. UPS paid a 34 percent effective tax rate…. Their [biggest foreign] competitior DHL pays a 24 percent tax rate. [UPS is] at 34, GE was at zero. Okay, what’s going on there? GE was able to utilize all of these various loopholes, all of these various deductions--it's legal." GE's tax return was a whopping 57,000 pages long.

The solution, Ryan said, is: "Get rid of those loopholes and lower tax rates by a corresponding amount. Don't lose revenue, but for every loophole you pull out, and deny a company from being able to get this little carveout, you can lower the rates so we can be more competitive with our competitors overseas. We want to stem the bleeding of jobs going overseas, of foreign companies buying U.S. companies and taking headquarters overseas."

The argument for corporate tax reform is closely tied to the argument for individual income tax reform because many small businesses are taxed as individuals. "The president’s budget raises their taxes to 44.8 percent. You throw Wisconsin state income tax on it, it goes over 50 percent," Ryan said at another townhall meeting in the spring of 2011. "The point I’m trying to make here is you keep going down that path and you’re going to shut down the economy and make it harder to compete and keep jobs."

Then Ryan brought home the point that higher taxes on the wealthy can't solve our debt problems. "A lot of folks think that just raising taxes on other people is kind of like the fairy dust that makes budgets all of the sudden balanced," he said. "If you took every profit from every Fortune 500 company today, it would fund the government for 40 days. If you took a 100 percent tax on every individual making over $200,000 and every couple making over $250,000, including all the small businesses—that’s a lot of money—you’d fund the government for 7 and a half months. If you just let the Bush tax cuts expire on top income earners, which is what a lot of people are advocating, the amount of revenue you’d get for over 10 years would get about half of this year’s deficit closed."

Of course, the Romney campaign also needs to explain why his plan wouldn't raise taxes on the middle class. The huge flaw with the charge against Romney is that it is based on a paper by the Tax Policy Center, which, like government scorekeepers, doesn't factor in economic growth when assessing tax plans.

The Tax Policy Center isn't saying Romney's model is incapable of producing growth, it just doesn't attempt to calculate growth. "[T]he TPC model assumes that regardless of the tax rate, people work the same amount, save the same amount, and invest the same amount," writes Princeton economics professor Harvey Rosen

But growth is the whole point of Romney's plan. And Princeton's Rosen concludes that under "plausible" growth assumptions, Romney's plan would neither require a net tax hike on the middle class or a tax reduction for the rich. "[A] proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on high-income individuals about the same," Rosen writes. "That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral."

Rosen concedes that we really don't know how much economic growth tax reform might produce, and we don't know how many deductions Congress will be willing to reduce or nix. What Romney could say is that if Congress can't pare back enough tax loopholes, he's still not going to raise taxes on middle class families, he's still not going to lower taxes on the rich, and he's still not going to add one dime to the deficit. He'd simply lower rates by an amount equal to the reductions in loopholes. In other words, his goal is a 20 percent reduction, but he's flexible and would take a 15 percent reduction to avoid raising middle class taxes or adding to the deficit.

Does the tax debate open up Romney to questions about his own taxes? Sure, but his response is pretty good: He made his money through investment income and Obama has proposed raising taxes on investment income--not to bring in more revenue--but simply "for purposes of fairness." 

That distills the tax debate quite neatly: Obama's more concerned about divvying up the economic pie more equitably than he is about growing the economic pie. Obama is a liberal Democrat more concerned about economic equality than economic opportunity. Romney is trying to reform the tax code, just like Ronald Reagan and the Democratic Congress did in 1986, to grow the economy and create jobs. 

There's no guarantee that Romney will win this debate. But if his campaign continues to evade the issue, it's a debate Romney will surely lose.

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